Bitcoin investors are excited about the potential disruptive force that cryptocurrencies and blockchain technology be in the global payments industry. Unfortunately, that disruptive potential doesn’t necessarily make bitcoin a safe bet for long-term investors.
According to Bernstein analyst Inigo Fraser-Jenkins, it is nearly impossible to determine an accurate valuation for bitcoin, which makes the cryptocurrency an extremely risky investment. Fraser-Jenkins also says arguments that bitcoin and cryptocurrencies should be considered a new asset class are flawed.
Investors get no cash flow from bitcoin, which makes it impossible to value using equity and bond valuation methods. It also has no interest rate, which makes it impossible to value using fiat currency valuation methods.
In addition to valuation hurdles, Fraser-Jenkins says questions over market liquidity, security, live pricing and blockchain forks are concerning for both institutional investors and regulators. Those arguing cryptocurrencies are a new asset class say their lack of price correlation with other asset classes can provide value for investors. Fraser-Jenkins says cryptocurrencies’ extreme price volatility mitigates much of that potential benefit.
Finally, Fraser-Jenkins says bitcoin may soon face social backlash over the environmental impacts of cryptocurrency mining. Both institutional and retail investors are embracing environmental, social and governance standards and investing only in assets that are socially responsible. Due to the massive amount of energy that is needed to mine bitcoin, Fraser-Jenkins says it would likely be flagged by many funds as an environmentally irresponsible investment.
“The very significant power consumption may attract the attention of regulators, but even before that, we cannot imagine that any pension fund which has stated an ESG goal … would be able to allocate to bitcoin in any way because of this point alone,” Fraser-Jenkins says.
Bitcoin bulls often compare the cryptocurrency to gold, but Fraser-Jenkins says there are simply too many unknowns for institutional investors to responsibly include cryptocurrencies in their allocations.
“Despite our desire to have a more open approach to what is included within an asset allocation decision, we think…
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